The War on Regulation: Endangering Society, but also Undermining Markets

The New York Times reports this Sunday, April 1 on the administration’s plans to roll back regulations on auto emissions of greenhouse gases and on fuel economy standards.

Ironically and disturbingly, the proposed rollback surpasses the request of auto industry executives. Just days before the announcement, Ford’s Chairman and the company’s CEO called in a blog post for “CO2 reductions consistent with the Paris Climate Accord.”

But Ford’s CEO also earlier asked the new administration to reopen a review of Obama-era rules targeted at greenhouse gas emissions and ambitious fuel economy standards because of the supposed danger to jobs. The new administration was all too happy to seize on another opportunity to undo progressive action of the Obama Administration.

The motives of the current administration go well beyond an anti-regulation philosophy; there seems to be a strong inclination, for example, to cater to every desire of the fossil fuel industry. The same is true for financial services. And there is also the appeal to political supporters of rejecting scientific expertise and of getting government (and the professional civil servants that supposedly comprise the “deep state”) “out of the way.”

Is government really “in the way”? Is regulation no more than a “cost” to industry? Is there a zero-sum relationship between regulation to promote health, safety and environmental quality, on the one hand, and business profitability, on the other?

The financial crisis of a decade ago, now wiped from memory by anti-regulation activists, tell us unequivocally, NO.

If there is a single lesson of the financial crisis, it is that poor regulation can create economic vulnerability that far exceeds in cost the potential burden of industry compliance with well-crafted regulation. Policy makers seemed to learn that lesson in the immediate aftermath of the crisis, but rapidly unlearned it in the partisan conflagration and assault on regulation that followed.

The result was the — unfortunately successful — “government is in the way” narrative.

In the 1990s, scholars Michael Porter and Claus van der Linde established that environmental regulation could in fact create incentives for innovation that would ultimately offset the costs of regulation.

Others have developed and gathered evidence for the “innovation offsets” argument ever since. In a 2014 Centre for European Policy Studies examination of much-criticized European Union regulation, Jacques Pelkmans and Andrea Renda found that EU regulation could accelerate the rate of innovation in industry, particularly when regulation was designed with flexibility and deployed with minimal bureaucratic burdens.

Regulations governing recycling of vehicles reaching the end of their useful lives, for example, stimulate advances in vehicle design that make dismantling of autos easier at the end of their useful lives. Such regulation also fosters advances in materials recovery and reuse technology.

Similarly, European Union ecodesign regulations create incentives for manufacturers to develop more energy efficiency appliances.

In the U.S., meanwhile, in addition to weakening numerous environmental regulations, the administration has during the past year weakened the Financial Consumer Protection Bureau established in the aftermath of the financial crisis. Congress also has moved toward easing other financial regulations put in place to forestall a repeat of the 2008-9 financial disaster.

Along with hostility toward immigrants, anti-regulation sentiment has been at the forefront of the Brexit movement. Ironically, in a recent major speech on the British approach to Brexit, Prime Minister Theresa May inadvertently revealed that industry values regulation for the market certainty it creates. While extolling the virtues of Britain being able to “make our own rules,” May let slip the stunning contradiction that exporters recognize that having uniform European regulatory standards lowers the transactions costs of doing business: “businesses who export to the EU tell us that it is strongly in their interest to have a single set of regulatory standards that mean they can sell into the UK and EU markets.”

In the initial post in this blog I referenced the magisterial work of Karl Polanyi, The Great Transformation. Polanyi taught us that there is no such thing as a “self-regulating” market. Humans can only prosper when there are reasonable rules bounding markets.

This is why factory owners began to push for regulations on child labor and other behaviors that would render competition limitlessly brutal in the early decades of the Industrial Revolution in the UK.

Claims that markets are best left in their “natural” state emanate from fundamental misunderstandings about the impact and value of regulation. Well-crafted regulation reduces externalities such as water, air and other forms of environmental pollution, and can reduce systemic financial risk.

Efforts to pare back regulation in the name of profitability rarely account for the (often large, but difficult to measure) benefits accruing from carefully crafted rules — in the case of greenhouse gases, the ultimate benefit of planetary survival.

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Even beyond this obvious gain, markets cannot function effectively without good rules.

Simply put, society and economy alike will suffer from the bonfire of regulations.

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